What Might Be Tagged At Dow’s Yardsale?

As you have may have heard, Dow Chemical plans to sell more businesses. Back in December, the company said it would get rid of its epoxy resins and chlorine-related business, which would make the bulk of $3.0 to $4.0 billion worth of divestitures. Mind you, these numbers here are a little funky. They refer to the pre-tax proceeds to Dow from transactions that aren’t necessarily even being negotiated yet. However, the company tends to get strong valuations when it sells businesses, so I would expect that the proceeds from deals would be within the range and even towards the top of it. Last week, at an investor event in Saudi Arabia, the company announced it would put an additional $1.5 to $2.0 billion in businesses up for sale. CEO Andrew N. Liveris wouldn’t say what the businesses are, but he would certainly characterize them. They would be nice businesses, likely coming out of its Performance and Functional Materials units, and perhaps reasonably profitable. But they would be more meaningful to potential buyers than they currently are to Dow. They would be, Liveris promised,  “Lots of small, little businesses that you never even track, that you never follow, and that you never even knew we had.” He was addressing analysts, thus casting a wide net. They are only acquainted with the solid form of ethylene known as polyethylene and Dow AgroSciences. The Chemical Notebook takes Liveris’ remarks as a challenge. What are the most obscure Dow businesses? Two that jumped out at me are are Dow Plastics Plastics Additives And Dow Oil & Gas. Dow put the plastics additives unit up for sale last year and then withdrew it from the market. Oil and Gas is tiny, about $270 million in annual sales. It is a market facing unit that sells chemicals for oil and gas exploration and extraction. This is a very marketable business, with companies such as Solvay and Ecolab plunging further in this area. My only reservation about Dow selling this business is that the chemistry on offer in oil and gas overlaps with other Dow businesses. Additionally, I combed through Dow’s Product Safety Assessment Finder, which by the way, is a great source of information for many chemicals. I asked question “what are the real oddball businesses?” Here are few (Don’t take this as a list of possible sales, though. Some, as you will see, are likely keepers.): Silicones and Feel Modifiers: These sound dirty. They’re not. They are used in leather finishing. They also sound like something Dow Corning would sell. With a tradename like ROSILK, I’ll guess these came from Rohm and Haas. ADSORBIA...

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TPC’s Proxy Decoded

Last week, TPC put out a proxy statement for its controversial $40.00-per-share sale to First Reserve and SK Capital. Shareholders, as evidenced by quotes between $41.00 and $42.00 for the company, are looking for a better offer. And Sandell Asset Management, which owns about 7% of the firm, has been outspoken against the deal. In such cases, disgruntled shareholders always argue that company management didn’t do enough to shop the company around for a better price. The Chemical Notebook has examined the proxy to get an idea about who was kicking in TPC’s tires and how serious they were: First Reserve (private equity) and SK Capital (private equity): These companies first darkened TPC’s door in early December with a $30.00 to $35.00 offer. This was rejected by TPC management. However, in early January, TPC and these parties signed a confidentiality agreement and First Reserve and SK conducted due diligence. These efforts yielded a $40.00 to $42.50 proposal by mid-February and a merger agreement was drafted. But in March, TPC’s stock price climbed to an all-time high of $47.03, forcing First Reserve and SK to abandon their bid. When the stock price declined back down in May, First Reserve and SK renewed their efforts. This yielded a $40 “best and final” offer in July. On July 27, SK and First Reserve signed an exclusivity agreement with TPC. The deal was announced on August 27. Party A (strategic bidder) and Party B (PE): These firms first signed a confidentiality agreement with TPC in January. Later that month, they decided not to pursue a deal because of other priorities. These parties later emerged from time to time throughout the sale process. In May, they told TPC that they might submit a proposal, but they didn’t. In early August, they indicated that they might be interested again if TPCs stock price declined further. Party C and D (both PE): These companies emerged in late January with a $38 to $38.50 offer. They presented TPC with a draft merger agreement in mid-March. They dropped out in mid-April because of the rising stock price. They reemerged in May 17 but dropped out for good on June 21 because of financing concerns. Party E (strategic): Contacted by TPC representatives in late-February, Party E said that it wasn’t contemplating strategic investments. It told TPC in mid-May that it wouldn’t submit a proposal. Party F (non-U.S. strategic): Expressed interest in early April. It said on May 18 it was interested in a bid. TPC representatives traveled to Party F’s headquarters in early June. At the end of the month, Party F informed TPC that it would not submit...

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Eastman CFO Outlines Acquisition Strategy
Jun20

Eastman CFO Outlines Acquisition Strategy

Last week, the Chemical Notebook headed to New York City to attend the 2012 IHS Chemical Financial Forum. Nice event, attended by 60 or so. It was emceed by Robert Westervelt, editor-in-chief of IHS Chemical Week. My dear longtime frenemy did a masterful job moving the conference along and asking good questions, as he usually does. It was a day packed with a lot of good speakers. Curt Espeland, chief financial officer of Eastman Chemical, gave the keynote, which was an overview of his company’s merger and acquisition strategy. This is a pretty timely topic given that Eastman is set to complete its $4.7 billion acquisition of Solutia next month. Eastman’s current M&A strategy is rooted in the turnaround that former CEO Brian Ferguson led a decade ago. Eastman had been a serial acquirer. It made expensive purchases of publicly traded firms like McWhorter Technologies and Lawter International to build up its coatings, adhesives, specialty polymers, and inks (CASPI) business. The acquired business didn’t congeal as planned. When Brian Ferguson took over in 2002, he initiated a three-part strategy for the company, Espeland says. The first part: Shrink before you grow. Eastman sold off $3.2 billion worth of business since 2002. This includes the sale of a large chunk of the CASPI-related businesses it had bought. Momentive now has those units. Eastman sold its polyethylene business to Westlake. A series of divestitures got Eastman out of polyethylene terephthalate. “Before we started this journey, we were the largest PET producer in the world,” Espeland told the audience. “Today we don’t even make the product in any meaningful way.” Worth noting here is that while it got out of commodity packaging polymers, Eastman kept specialty polyesters, leaving intact a core chemistry capability. This seems to be paying off with its Tritan polymer. The next part of Eastman’s strategy: Earn the right to grow. This entailed improving the profitability of the business that it kept. Now with new CEO Jim Rogers, Eastman has switched to its third phase: growth. “Joint ventures and acquisitions has become the primary tool we’re using to pursue that strategic shift,” Espeland said. Curiously, the pre-Ferguson era fomented queasiness over acquisitions at Eastman. “In fact, we had a negative bias against acquisition because of our history in the late 90s,” he said. Management had to reverse that. The company started out small, focusing on small “bolt-on” acquisitions. Through purchases such as Genovique Specialties and Sterling Chemicals, Eastman has quietly doubled the size of its non-phthalate plasticizer business, to $600 million. These acquisitions helped Eastman build capability and confidence—enough to attempt the purchase of Solutia, a deal about 30...

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Eastman Buying Solutia

I arrive the office this morning, bright and early, as usual. “Your Top 50 U.S. chemical company survey will get smaller by one company,” C&EN assistant managing editor, Mike McCoy, said. “Do you want me to guess?” I said. “Solutia is one of the firms.” “That is the company being acquired,” I reply. “That’s right.” “PPG is buying them,” I guessed. “No, but that’s an interesting guess,” Mike says. It was a very good guess. “Ashland?” “No, too soon.” Ashland, Mike realized, just bought ISP. “Eastman!” “Very good!” Mike exclaimed, very impressed. Indeed, Eastman is buying Solutia in a $4.7 billion transaction. The relevant details are in my Latest News story here. I have a few observations: 1) It seems like a nice, square deal for all parties. My calculations put the cash and stock portion of the deal at $3,357 million and the debt at $1,377 million, combining for the ~$4.7 billion price. The cash and stock represent a 13.8x multiple over adjusted earnings of $243 million. 2) Since declaring bankruptcy in 2003, Solutia has honed its business where it has a strong position such as hydraulic fluids and polyvinyl butyral (PVB) interlayers for windshields. The cash cow of the portfolio is the technical specialties business, which generated a 38% EBITDA margin. It makes the hydraulic fluids, heat transfer fluids, and insoluble sulfur, used to vulcanize rubber. 3) Integration? PVB is made by reacting polyvinyl alcohol, which Solutia makes, with n-butyraldehyde. It just so happens that Eastman is America’s largest producer of n-butyraldehyde, which it uses to make oxo derivatives like 2-ethylhexanol. 4) Solutia is an ex-Monsanto business. Sterling, which Eastman acquired last year, is a former Monsanto unit. Spooky? Yes. Coincidence?...

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DuPont CEO Irked By Reporters

Here at the Chemical Notebook, we recently posted about some rumors swirling regarding DuPont possibly putting its coatings business up for sale. At DuPont’s investor day yesterday, DuPont CEO Ellen J. Kullman fielded a question about this from Deutsche Bank analyst David Begleiter. In her answer, she revealed that she’s none too pleased with the reports: Yes, I mean, around the rumors that have been swirling, quite frankly, I’m a little appalled at the (inaudible) responsibility of certain media outlets. I think it’s just terrible. I mean, I go into places and some people say, hey, I saw your announcement. Obviously, we didn’t make one. But we have 13 businesses. We put them through a very vigorous portfolio process around markets, competition, our capability, and science. We establish very clear goals. And we expect them to meet them. We put in top leaders like John McCool, who just went in to coatings a year ago. And very specific goals for improving. She continued… But we’ve been very clear. If things — any business. I love all my children equally until I don’t love them. It’s my phrase. Now that does bother my own children, but in business it seems to work. But I mean, so time we’ll tell about any part of our portfolio and where it sits. You saw the pruning that we do on the product lines that both industrial chemicals and crop protection and things like that have done in the list. But if something changes, we’ll be the first one to come out and talk to you. But first and foremost, we’ve established aggressive goals. We have the right kind of leadership. Let’s see what we can get done. A few points: 1) Two of these reports, from Bloomberg and Reuters, broke on the afternoon of October 28, nearly simultaneously, citing people familiar with the matter. (My previous post links to all three). Dow Jones had its own version a few days later. When a story is deemed solid, journalists are under no ethnical obligation to await an official announcement. 2) Perhaps Kullman should be lecturing the probable leakers. DuPont’s investment bankers would be a good first call. Though, they were probably using their best judgment, too. 3) Extending the children analogy. Is the coatings business that adult child that still lives with his parents and needs a gentle push into his own apartment? 4) I remember back in 2007, Britain’s Sunday Express ran a kooky story about how private equity firms and a Middle Eastern government were planning a takeover of Dow Chemical. CEO Andrew N. Liveris noted that the rumors appeared “on the...

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Deal Activity Down In The Third Quarter

I thought the news flow had been a little slow lately. PricewaterhouseCoopers has released its quarterly Chemical Compounds newsletter that tracks merger and acquisition activity. It looks like we are in the middle of a full-fledged deal slump. There were 22 chemical deals worth $50 million or more in the third quarter of 2010, the accounting and consulting firm reported. During the second quarter, there were 31 deals of that size. The last time there were 22 or fewer deals was in the second quarter of 2009, right at the tail end of the credit crunch/recession. Average deal size actually increased during the quarter, from $476.4 million in Q2 versus $725.6 million in Q3. But the Q3 number is a little on the low side historically. Moreover, four deals weighing in at over $1 billion drove up the figures. These are Ecolab’s purchase of Nalco ($8.1 billion); Tronox’s merger with Exxaro’s mineral sands unit ($1.3 billion); Lonza’s offer for Arch Chemicals ($1.2 billion); and OM Group’s acquisition of Vacuumschmelze ($1.0 billion). [I know what you’re thinking: What the heck is a Vacuumschmelze? No, it isn’t that gunk you find when you clean out your Hoover; it is a German magnetic materials maker.] The pace of chemical making was especially slow in Q3 for private equity firms. Financial buyers accounted for only 1.25% of the total of $16 billion in transactions. This is the lowest level ever since PwC started tracking M&A in 2006. “This shift may be due to the relative advantage that strategic investors have given their ample cash stockpiles, in addition to generally higher valuations in the sector,” PwC said in the...

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